Contract Negotiation Fundamentals
Negotiate a contract’s commercial and legal terms.
The give-and-take procedure that the parties go through in order to achieve an agreement is referred to as contract negotiation. Or, as the saying goes in business, “you don’t get what you deserve; you get what you bargain for.”
This essay will go through the fundamentals of contract negotiation.
Trading is all about balancing risk and profit.In a normal contract negotiation, each side makes concessions on specific topics in order to get what they really want. Even while there are always intricacies to work out, most contract talks come down to two basic considerations: risk and return.
In an apartment rental agreement discussion, a landlord wants to produce lucrative rental revenue (income) while retaining the right to swiftly remove the tenant and safeguard the property in the case of a crisis (risk).
Sam, the landlord, is aware that renting from Camille, a competent tenant with excellent references who has lived in her previous flat for fourteen years, may decrease his risk. Camille’s offer to sign a one-year lease at a reduced rate is being considered by Sam. Sam understands that a poor renter may cost him months of missed revenue (not to mention wasted time and legal fees). He accepts Camille’s lesser offer since the reduced risk it entails outweighs the loss of income.
Contract discussions are often divided into two stages: discussing fundamental terms and conditions first, followed by negotiating legal terms.Returning to the example of owner-tenants, Sam decides to rent his residential property to Camille. Camille sees the flat and negotiates a one-year lease for $1,500 per month. You agree to pay the first and final month’s rent, as well as a deposit, in advance. In a month, she’ll be moving into her new home. Sam and Camille shake hands, and Sam says he’ll mail a “normal” rental agreement.Camille gets the formal rental agreement a week later. It includes all of the fundamental conditions she and Sam discussed at the home, but it also includes many unpleasant clauses, such as one about legal costs and their need to buy insurance. She dials Sam’s number, and the two discuss the situation. Sam eventually agrees to pay the legal costs, and Camille agrees to get tenant insurance. Camille signs the lease after Sam double-checks it. (For additional information on contract clauses, see Nolo’s article Common Boilerplate Provisions in Contracts.)When does a contract become legally binding?Is it when the parties come to an agreement on the terms and conditions, or when the legal terms are finalized?
A contract is only completed under contract law when all necessary elements of the deal have been discussed and agreed upon. A legal disagreement over whether or not a contract exists therefore boils down to whether one of the remaining legal issues is an essential element of the agreement.Return to Sam, the proprietor, and Camille, the prospective renter. Assume Sam refuses to alter any of the conditions of her regular rental agreement, but Camille has already left her existing apartment because she mistook her handshake with Sam for a contract. If the legal costs and insurance agreements are an essential element of the agreement, she has the authority to force Sam to comply with the agreement or to pay him damages.If the parties have approved the agreement’s terms and conditions and want to continue before completing the legal specifics, they may utilize an escrow account or make the release of money contingent on the signing of a formal agreement. This eliminates the issue of having to hunt down the deposited funds if the transaction does not go through. If the talks fail, everyone gets their money back and goes on.
Lawyers and bargaining
You may have encountered the following scenario if you own or manage a company. Your business believes you have an agreement on the terms and conditions of a deal with another firm. Both parties hire attorneys to sort out the specifics, and once the lawyers get involved, everything goes down the toilet. This may be due to the fact that attorneys have three potentially contradictory variables to consider while negotiating. You want to:While most attorneys concentrate on the first and second criteria, other lawyers like dragging out discussions while the time is ticking. To some degree, the client may exert influence over this stage of the negotiation by being aware of the issues remaining at stake, prioritizing the key risks, and directing the lawyer appropriately.How would you describe your negotiating style?There are many different types of trading, as you may have seen on TV programs like The Apprentice. The two most prevalent approaches are combative (“I will control you”) and collaborative (“We shall flourish together”). The many negotiating techniques are, of course, employed by actual individuals who bring their temperaments, emotions, and personalities to the table along with their list of words. One negotiator may raise his or her voice and threaten to storm out of the room, while another may debate coldly and impartially.Roger Fisher and William Ury, authors of the book Getting to Yes, pioneered the contemporary method to contract negotiations at Harvard University. According to these writers, constructive discussions with little emotional outbursts are more likely to achieve optimum outcomes. Anger and related emotions tend to obscure judgment, promote rivalry, obstruct mutually beneficial solutions, and sometimes lead to retribution in problem-solving.
The “take it or leave it” dilemma when negotiating a stance
The relative bargaining stance of the parties is one of the keys to the result of contract negotiations. A side with much more negotiating power, such as a landlord operating during a housing crisis or an employer recruiting during a recession, is not required to bargain. Instead, these heavyweights often draft a contract that instructs the weaker party to “take it or leave it.”
This may occasionally backfire in membership contracts, which cannot be negotiated, since the less fortunate party might then claim that a condition is unfair or improper.When you have the upper hand in a negotiation, it is not always in your best advantage to dictate all of the conditions. “You should never attempt to earn all your money in one market,” J. Paul Getty’s father reportedly told him. Allow the other person to earn money as well, since if you have a reputation for constantly making all the money, you will not.